Bank of England Preview: Back to back hikes?

The Bank of England are back in our lives this week and the expectation is for a 25bps hike (90% priced by short term rates markets). Although my call is also for a hike, similar to consensus, one can never really be too sure with those at Threadneedle Street given what happened in November 2021. A hike at this meeting would be the first back to back hike since 2004. We’ve already seen traditions broken with the December hike. There’s been zero pushback from MPC members regarding the market’s pricing, so if they don’t hike (see this as unlikely) I expect some serious volatility in gilts and GBP crosses. Given the economic backdrop of red hot inflation (energy price cap lifted in April adding further pressure if no gov support), tight labour market and very minimal scarring from the omicron slowdown it would be strange for the BoE not to act.

The vote will an interesting metric to look at as potential read through to the speed of the hiking cycle post this meeting. I see an 8-1 vote being the most likely outcome with perennial dove Tenreyro as the hold out. I do wonder if Haskel will be added to the list of dissenters. Governor Bailey’s presser will also be key to assess his language and how hawkish it is. Could they drop the word “modest” from their guidance on the degree of tightening necessary to bring inflation back to target. The hike to 50bps would mean the threshold for balance sheet reduction of their current £895 bn holdings of bonds would be reached. That should begin immediately, but the BoE may want to provide some colour on how the process would work. We know like the Fed, based on Bailey’s comments that the bank rate is seen as the preferred tool for normalizing monetary policy as opposed to quantitative tightening. Lastly, given this meeting will provide a fresh set of economic forecasts, it will be interesting to see where the BoE pin their 2024 inflation forecasts based on market rates. Currently, rates pricing is pretty rich at 125bps by the end of this year. So could they push back against this via their inflation forecasts to let the market know they’ve gotten ahead of themselves (below 2%).

GBPUSD:

Cable is putting in some large gains ahead of tomorrow’s meeting. It found a nice price floor around the 1.34 level, just below the 50-day SMA and the 61.8% Fibonacci level. Price is now approaching the 1.36 level, around the upper trend line of the descending channel. The RSI has also managed to breach the 53.6 resistance level. On the upside 1.36 will be key. On the downside, 1.345 (just above the 50-day SMA and the 50% fib level) will be important.